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Growth Drivers and Resistors of Big Pharma Performance 1

Growth Drivers and Resistors of Big Pharma Performance

Abstract

The performance of Big Pharma or the Top 10 pharmaceutical companies in the world

by sales, is a key determinant of the world pharmaceutical market performance. The

emerging key growth drivers and resistors of Big Pharma performance are: Drug

discovery dilemmas, Regulatory conundrums and Demographic dynamics.

Today, the drug discovery process takes longer than ever, costs more than ever, but

delivers less than ever. Drug safety concerns are at their peak. With Big Pharma

accounting for a substantial chunk of the R&D spend and new drug launches, drug

discovery becomes a significant area of concern. Critical transforming technologies and

novel drug delivery systems threaten to revolutionise the industry, if viable and safe.

Regulatory issues like patent expiries, pricing pressures and the generic onslaught are

severely testing Big Pharma margins and market shares. Tectonic demographic shifts,

stress-filled but sedentary lifestyles, and unmet clinical needs are driving the demand

for lifestyle and lifecycle drugs.

Big Pharma

The concept of Big Pharma assumes significance due to their growing domination of the

global pharmaceutical market. Big Pharma in 2004 is equally divided between five

European and five US based companies.


Growth Drivers and Resistors of Big Pharma Performance 2

Big Pharma Performance- 2004


World
Market R&D Pharma
Rank Big Pharma Origin Share Growth Spend Focus
% % % %
1 Pfizer US 9 17 17 88
2 GSK UK 7 10 17 84
3 SanofiAventis France 6 69 17 94
4 Merck US 4 2 17 100
5 J&J US 4 13 15 47
6 AstraZeneca UK 4 14 18 100
7 Roche Switzerland 3 47 15 69
8 Novartis Switzerland 3 15 18 65
9 BMS US 3 4 16 81
10 Wyeth US 3 4 18 80
Big Pharma 46 17 17 (Average) 81 (Average)
Source- Company Annual Reports 2004

Traditionally, major US based Big Pharma like Merck, Pfizer, Johnson & Johnson,

EliLilly and Wyeth have been healthcare focused, while the European Big Pharma with

the exception of Glaxo, have been part of larger chemical, food or consumer

conglomerates like Hoechst, Beecham, Bayer, Ciba and Sandoz.

Big Pharma’s focus on pharmaceuticals has increased from an average of 49% in 1983

to 64% in 1998 to 81% in 2004, an ominous sign for the smaller players. An increased

focus and a flurry of mergers and acquisitions have doubled Big Pharma’s share of the

world pharmaceutical market to almost fifty per cent, over the past ten years. This

consolidation clearly outlines the growing importance and domination of Big Pharma.
Growth Drivers and Resistors of Big Pharma Performance 3

Big Pharma has also consistently outgrown the world pharmaceutical market with a

double digit growth rate. In 2004, Big Pharma grew at more than double the industry

growth, and if their almost 50% world market share is also considered, it clearly implies

that the entire world pharmaceutical market growth, is driven by Big Pharma.

Growth Drivers and Resistors of Big Pharma performance

Growth drivers and resistors are key factors that stimulate growth and change, and

hence affect performance.

Drug Discovery Dilemmas

The R&D process entails million of dollars in R&D spend, through a long and

complicated process, involving drug tests in the laboratory as well as on animals,

healthy volunteers and patients. Out of 5000 molecules on which R&D is initiated, only 1

molecule is actually launched in the market, with the others being weeded out during

the discovery process1.


Growth Drivers and Resistors of Big Pharma Performance 4

The World pharmaceutical R&D spend has trebled over the past 10 years, while new-

drug discovery costs have doubled during the same period. With an increase in the new

drug discovery period to almost 15 years2, the harvest period or the period during which

the drug is marketed has reduced to only 8 to 10 years, assuming a patent period of 20

years. This reduced harvest period can severely hamper margins on successful drugs.

Big Pharma markets 75 per cent of all new drugs approved and accounts for 66 per

cent of the total R&D spend. But, the last couple of years has seen fewer new

molecules being approved by the USFDA. Entirely new class of molecules or significant

advances are not forthcoming except for a few, in the last decade. Moreover, post

launch only 30 % drugs recover costs3. Considering the above factors, R&D productivity

affects Big Pharma performance significantly.

Despite the stringent drug discovery and approval process, there has been a glaring

increase in the number of drugs banned, withdrawn or recalled in the past few years.

Even drugs for innocuous indications like common cold have been banned as they have

been found to lead to haemorrhagic stroke. The impact of such recalls on Big Pharma is

tremendous in terms of profits, revenue loss, opportunity loss and patient litigation

costs. However the breach of trust felt by patients and physicians who have consumed

or prescribed such drugs in good faith for long years, is irreparable and beyond

measurement.
Growth Drivers and Resistors of Big Pharma Performance 5

Regulatory Conundrums

Patents help Big Pharma protect their molecule franchises for twenty years. Successful

molecules result in huge sustained cash flows, which can be extremely profitable and

help shore up existing products as well as fuel future projects.

Big Pharma performance is severely impacted by patent expiries to their prestigious

molecules. Out of the total patent expiries between 2002 and 2007, 66% of the

molecules will be from Big Pharma portfolios, which translates to a 78% share of the

total revenue loss that will accrue due to patent expiry, at today’s sales value.

These are only the obvious financial implications, but by factoring in barren pipelines,

impact of drug recalls and the uncertainty over USFDA approvals, the total implications

for Big Pharma transcend any appraisal index.

The advent of the generic players, post patent-expiry, can wreak havoc with revenue

streams. Generic impacts have caused sales erosion, even to the extent of 80 % of

sales within one year of patent expiry. Such a sales void can be extremely arduous to

compensate, even for Big Pharma.

In 2004, generic drug approvals in the US were more than 10 times the number of new

branded-drug approvals. Growth in generics outpaced that of branded drugs 3:1 due to

sheer affordability. Generic players have also become smarter and swifter at attacking

vulnerable Big Pharma franchises, even before expected patent expiry periods.
Growth Drivers and Resistors of Big Pharma Performance 6

The average cost of a generic drug is 20 % of the cost of an average branded

prescribed drug, in the world’s largest market, the US4. Prohibitive drug costs are

ensuring a perceptible shift towards affordable drugs, from governments, medical

Insurance companies and powerful patient lobbies, an ominous sign for Big Pharma and

a great opportunity for quality players from developing countries. .

Demographic Dynamics

World wide, the increased life expectancy is a result of better nutrition, effective

medicines and improving healthcare facilities. People above 60 years of age, are

growing at thrice the average world population growth rate. The frenetic pace of life,

stressful and sedentary lifestyles coupled with junk food and irregular eating habits, are

triggering worldwide demand for a variety of chronic (long term) therapies like mental

health, cardiovascular, diabetes and lifestyle drugs.

The age group vulnerable to such maladies has reduced from 50+ years in the 1980s to

to 30+ years today5. Serious diseases are being contracted early, but people are living

longer, and hence the total treatment periods for serious disorders have trebled from 10

years in the 1980s to 30 years today6. This prolonged drug usage ends up causing

newer side effects, as drugs are being consumed for periods much greater than what

the drugs may have been initially tested for.

The growing number of the elderly patients is ensuring a higher incidence of geriatric

diseases like Alzheimers, urinary incontinence, rare cancers and Parkinsonism.


Growth Drivers and Resistors of Big Pharma Performance 7

A rich and image conscious but aging society, that is prepared to fork out money to slow

down the natural aging process, is propelling demand in the price insensitive lifestyle

segment. Drugs that improve mental agility, reduce weight and rejuvenate sexual

function would certainly emerge as future blockbusters.

These tectonic demographic shifts have resulted in a boom for chronic therapies, where

Big Pharma is well entrenched and focused on. The Top 10 therapy areas (TA) account

for 72 % of the world pharmaceutical market value and are the principal growth drivers.

Big Pharma accounts for more than 50 % share of all the major therapy areas with

brand leadership in the Top 10 therapy areas.

Over the next 5 years, as populations age and/or become westernised, mental health,

obesity, diabetes, cancer, metabolism and heart disease segments would drive growth.

As Big Pharma remains a major player in the therapy areas estimated to be significant

by 2010, their continued presence and competence in these segments could be their

significant future growth driver.


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Conclusion

As Big Pharma domination of the world pharmaceutical market increases, the key

dynamics affecting Big Pharma performance assume importance. Growth drivers like

demographic dynamics, where Big Pharma enjoys significant presence, need to be

harnessed, with an eye on the future. Current growth resistors like R&D productivity,

new drug output and patent expiry management, all earlier inherent Big Pharma

strengths, need to be leveraged effectively. Focus areas would be addressing unmet

clinical needs, value pricing and safe medicines to win back patient and physician trust.

Full Text Word Count - 1560 words

Key Words- Big Pharma, Performance, Growth Drivers, Growth Resistors

Document Type- Research paper

Geographic Terms- World Pharmaceutical market


Growth Drivers and Resistors of Big Pharma Performance 9

About the Author


Amit Rangnekar is pursuing a PhD in Business Strategy from Narsee Monjee Institute of

Management Studies (NMIMS), Mumbai, where he is also a visiting faculty in Marketing.

Equipped with a Masters in Marketing Management from Mumbai University and 15 years of

progressively responsible pharmaceutical industry experience, his research interests revolve

around the key dynamics and demographics, affecting pharmaceutical strategy and performance.

Email- amitrangnekar@gmail.com

Bibliography
• IMS

• Scrip

• Express Pharma Pulse

• Pharmabiz www.pharmabiz.com

• USFDA www.usfda.gov

• Forbes

• Economist

• Company Annual Reports

References

1
Emerging Standards for Drug Discovery and Development:Perspectives on Technology, Strategy and
Relationships October 8, 2002 http://www.milestonedevelopment.com/CPSA/2002/tu_oa1.html
2
Tufts center for study drug development, Outlook 2001, Tufts university
3
Grabowski, H., “Returns on Research and Development for 1990s New Drug Introductions,”
Pharmacoeconomics 20 (December 2002): suppl. 3, 11-29.
4
Gross D., Prescription Drug Prices in Canada: What Are the Lessons for the U.S., AARP, retrieved from
http://www.aarp.org/international/Articles/a2003-07-11-ia-perspectives.html
5
Centaur databank, Survey of Indian physicians, patients and pathologists- Nov 2004
6
Centaur databank, Survey of Indian physicians, patients and pathologists, Nov 2004